Plaintiff Netflix subscribers alleged that Netflix and Wal-Mart
violated Sections 1 and 2 of the Sherman Act by entering into to a
horizontal market allocation agreement. In re: Online DVD
Rental Antitrust Litigation, No. M 09-2029 PJH, Order Granting
Motion For Summary Judgment (N.D. Cal. Nov. 22, 2011). Netflix and
Walmart entered into a Promotion Agreement under which Netflix
would rent but not sell DVDs online, and Walmart would sell but not
rent DVDs online. Walmart would promote DVD rentals by Netflix, and
Netflix would promote the sale of DVDs by Walmart.
The Promotion Agreement stated that Walmart had previously decided
to exit the online rental business, which it did after entering
into the Agreement. Netflix paid to acquire Walmart rental
customers. Netflix had stopped selling DVDs online prior to the
creation of the Agreement. The Agreement also stated that Wal-Mart
could reenter the online rental business if it chose to do
so.
Plaintiffs claimed that their injury arose from Walmart's exit
from the rental business, which allegedly left Netflix free to
charge supracompetitive prices to consumers for DVD rentals, which
it allegedly did.
After the court certified a plaintiff class of Netflix subscribers
and after Walmart had settled out, Netflix sought summary judgment
on a number of grounds. The District Court, Phyllis J. Hamilton,
J., found against plaintiffs in a 29 page opinion. The court held
that plaintiffs could not establish the essential element of fact
of injury, and accordingly granted defendant's motion for
summary judgment. In the course of its analysis, the court held
that the per se rule could not be applied to the Promotion
Agreement. Slip opinion at 9-16. The court did not make a
definitive ruling under the rule of reason because of its holding
that plaintiffs could not establish causal injury-in-fact. Slip
op. at 16-19.
Per Se Rule
In rejecting application of the per se rule, the court held that
the Agreement was not one "that facially appears to be one
that would always or almost always tend to restrict competition and
decrease output." Slip op. at 9 quoting National
Society of Prof'l Engineers v. United States, 435 U.S.
679, 692 (1978) (test for per se illegality); accord
State Oil Co. v. Khan, 522 U.S. 3, 10 (1997). The per
se rule applies to "'[c]lassic' horizontal market
division agreements [which] are ones in which 'competitors at
the same level agree to divide up the market for a given
product.'" Slip op. at 10, quoting California
v. Safeway, Inc., 651 F.3d 1118, 1133 (9th Cir.
2011) (citation omitted).
Evidence supported Netflix's contention that Walmart considered
its rental business to be a failure and determined on its own to
withdraw from that business, rather than withdrawing from the
rental market as a quid pro quo in exchange for Netflix's
agreement not to sell DVDs in competition with Walmart. The court
noted that Walmart had 1.5 percent of the DVD rental business,
while Netflix had seventy percent and Blockbuster had the balance.
Walmart's minimal market presence made it unlikely that its
withdrawal would restrict competition, particularly when
Blockbuster would continue to provide competition. Slip
op. at 15. Netflix adduced credible evidence to show that the
Agreement resulted in "increased output in rentals," and
to support its contention that "the eventual agreement between
the parties reflected Netflix's desire to capitalize on
Walmart's independent realization that its online DVD rental
service was not profitable, and to profit from such realization by
negotiating terms upon which Netflix could acquire Walmart's
existing subscriber base and then improve upon this acquisition
with cross-promotional efforts." Slip op. at 14.
There was no legal authority "clearly establishing the
manifestly anticompetitive nature of joint promotion agreements
such as the one in question." Id. at 16. The court
refused to treat the Agreement as a "naked" market
allocation agreement, and therefore declined to apply the per
se rule of illegality.
Rule Of Reason
When arguing for liability under the rule of reason, plaintiffs
continued to maintain that Walmart's withdrawal from the rental
market was a quid pro quo for Netflix agreeing not to
compete in the DVD sales market. They also adduced evidence that
assertedly supported their contention that the online DVD rental
market was negatively impacted as a result of the Agreement, as
measured by lower output and unresponsiveness to consumer
preference. They claimed that "Walmart was poised to rapidly
grow its subscriber base via a major deal with Yahoo! and gain
traction in the DVD rental market." Slip op. at 18.
Netflix countered with evidence assertedly showing that it had
lowered prices and improved service since entering into the
Agreement, together with showing that consumers benefitted from the
Agreement and that "Walmart's significance to the market
and ability to impact the market was minimal." Slip
op. at 17.
The court did not reach the issue of whether the Promotion
Agreement and the defendants' conduct violated the rule of
reason. This was because "plaintiffs have not, and cannot
demonstrate, a triable issue as to competitive injury."
Id. at 18.
Fact Of Injury
Plaintiffs claimed that Netflix would have lowered prices had
Walmart remained in the rental market. Netflix argued that Walmart
was an insignificant competitor in the rental market, and that
neither its exit nor its participation on the market had any impact
on Netflix's pricing.
Plaintiffs provided internal Netflix documents reflecting concern
that Walmart's presence had prevented Netflix from raising
prices. E.g., Slip op. at 20 (Netflix memo
discussing potential price increase and saying that Netflix
"didn't want to risk it while Walmart [was] still
lurking"). Internal emails from both "Netflix and Walmart
purportedly demonstrate[ed] that both companies viewed Walmart as a
significant competitor to Netflix." Slip op. at 21.
Plaintiffs also adduced expert testimony to show that Walmart
exhibited downward pricing pressure on Netflix that would have
forced Netflix to reduce prices. Id. at 21-22.
Netflix provided evidence to show that, among other things: no one
in the online DVD rental business based pricing decisions on what
Walmart did; that objective evidence showed that Walmart failed to
exert any pricing pressure on Netflix; that Walmart's share of
the online DVD rental business was de minimus; that
Netflix did not lower its prices when Walmart had entered the
market; and that Netflix did not lower prices in the face of a
price cut by Blockbuster. Slip op. at 22-24. Further,
plaintiffs' expert "concedes that no competitors responded
competitively to Walmart in online DVD rental in pricing
terms." Id. at 24.
The court found that Netflix's evidence had proven "market
facts" defeating plaintiffs' contention that subscribers
would have paid lower prices absent the Promotion Agreement.
Id. There being no triable issue on fact of injury, the
court granted summary judgment as to both plaintiffs' Section 1
and Section 2 claims.
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